Wednesday, October 31, 2012

When will the trains be running again? That is one of the big questions in the aftermath of Hurricane Sandy. It matters because it affects so many workers — millions of people who, at this point, don’t quite know how to get to work.

Getting the trains to run was once an important political symbol. If the trains run reliably, many other things follow, related to commerce and work. In New York City this morning it is estimated that 46 miles of subway train tracks are underwater, and there are problems with other tunnels too. The prospect of a major city where the trains aren’t running and people can’t get to work will lead to some extraordinary adjustments over the coming weeks. These will, I am sure, include some changes in the political conversation.

Tuesday, October 30, 2012

The eye of the storm might have passed by here, but with minimal damage compared to other places. Power has been out since midnight and there are fallen trees, but the streets are more or less open.

Among its other records, I am told Hurricane Sandy was the lowest atmospheric pressure ever recorded in Pennsylvania. That low pressure may allow it to carry on as an unusually large post-tropical depression, perhaps all the way to the North Pole. People in Pennsylvania are already wondering if the river flooding to follow will compare to Hurricane Agnes. Unfortunately, the weather radar doesn't offer much hope of the rain stopping today.

Monday, October 29, 2012

It would not have been a pretty picture if the stock market had opened today. Imagine technicians walking the seven miles from the Upper West Side on unlit streets through torrential rains to open the exchange, and others crossing the Brooklyn Bridge on foot in gale force winds. They arrive to see the Wall Street bull partially submerged and the front entrance boarded up and sandbagged, with hurricane waves lapping at the steps. Once inside, after shaking the water out of their boots, they meet the captains of capitalism who, oblivious to the drama outside, are fretting over the latest strategies for buying low and selling high.

I exaggerate, I think. Yet a scene similar to this nearly happened. New York’s weather forecast has barely shifted in three days, yet it was just hours ago that the New York Stock Exchange said it would not be opening. The wording of the report hinted that someone in Washington had twisted their arms.

Denial is a natural component of the response to an unfolding disaster. It can’t be as bad as it looks. This thought is all the more natural for a disaster of a kind that no one has ever seen before. Yet some of the reaction to Hurricane Sandy goes beyond a mere psychological reaction of denial. Some of it looks more like denialism. It is a habit of forced positivity put forward like a barking dog to guard a shaky position of privilege.

But it is a barking dog that would not protect New York from one of the largest hurricanes ever seen, no more than the word “unsinkable” protected the Titanic. In the end, New York did close its subways, its schools, even its stock exchange. The costs and risks involved were that much greater for the days of dithering, but at least the decisions were made while there was still time to take action. Surely some evacuations will be needed beyond those already taken, but they may be a matter of a few blocks or less as people move to higher ground or a more secure structure.

As for me, the forecast puts the center of the storm near here around this time tomorrow. I have saved up water and food and charged batteries. I have blankets. With any luck, I will be able to keep working.

The official forecast warns of trees being uprooted. I have a hard time imagining that, yet the forecast maps suggest hours of tropical storm winds, so obviously, trees will come down. They will break utility wires and block roads. If last year serves as a guide, I can expect an extended power outage, including a cellular outage. There has been a momentary loss of power here already. I will post my status tomorrow or as soon as I can.

Sunday, October 28, 2012

The first clouds from Hurricane Sandy arrived in Pennsylvania before dawn yesterday, and today it is raining. These affects have come from a storm that is still far away, east of Florida yesterday and South Carolina this morning. It is a big storm, already one of the largest hurricanes ever seen on radar off the U.S. East Coast and getting larger as it absorbs a storm system on land.

When it reaches land, it will affect a wide area that includes several major cities, and this is one of the most distinctive aspects of the response to the weather event. If things get really bad in New York City, it may have to call in reinforcements from Kentucky. The nearby states and provinces will have problems of their own.

There is a chance of real trouble in New York, with forecast models estimating a 1 in 10 chance of storm surge and waves high enough to flood electric and rail tunnels in parts of Manhattan. Some forecasters are putting that chance closer to 1 in 3. If the area of tropical storm force winds is an indication of the storm surge, then the New Jersey coast, New York Harbor, and Long Island Sound may be in for record-setting coastal flooding.

Here is one hopeful sign: trees here have dropped most of their leaves in the last four days, and will surely lose more as the first wind gusts arrive. With few leaves, tree branches are not so easily damaged by wind gusts, and this may reduce the tree damage and power outages. There is another side to this, of course: leaves on the ground tend to clog storm drains and will worsen street flooding. For my part, though, I would rather have power on the day after the storm than be able to go anywhere.

Already today, many people are just staying home, and most people will expect to stay put from Monday afternoon to Tuesday afternoon. The reduction in demand for fuel for transportation may just match the loss of production as refineries limit operations for high winds.

Friday, October 26, 2012

Closing a bank is meant as a low-key, matter-of-fact kind of process, in order to avoid adding to any anxiety that bank customers might already be feeling. I saw a glimpse of this tonight when I took these photos of the Lionville branch of NOVA Bank in Exton, Pennsylvania, about three hours after state regulators closed the bank. There was nothing about the sign out front that indicated that anything had changed. The only hint that something unusual was going on was the number of cars in the parking lot, about seven, and several people at work in the building, hours after it would normally have gone dark for the night. But the sight was hardly anything that would catch the attention of someone passing by.

In spite of the innocuous appearance, the bank branch pictured here is closed for good. Most bank branches that close reopen the next day or the following week as branches of an acquiring bank. That was not the case at NOVA Bank. The FDIC will mail checks to depositors on Monday.

NOVA Bank had about 10 locations in southeastern Pennsylvania along with two in New Jersey. It was a midsized bank with almost half a billion dollars in deposits. It had more than its share of problem loans. It also had a criminal scandal, in which the chief lending officer was found to have taken money from customers’ lines of credit. The FDIC banned the officer in question in January and took a closer look at the bank’s financial controls.

The FDIC has appointed National Penn Bank as an agent for customers’ federal government direct deposits, but only at seven locations and only for a limited time. Customers should make new banking arrangements immediately beginning on Monday.

It is far more work for the FDIC when it has to wind down a bank. One of the first tasks is to figure out who all the depositors are. All the accounts for each depositor have to be put together to determine whether the deposits in aggregate fall under the $250,000 FDIC insurance limit. This has to be done over the weekend so that the FDIC can send checks to depositors on Monday. Later, the FDIC has to sell off all the assets, including loans, real estate, and banking equipment. All this work means that the costs to the Deposit Insurance Fund are higher in cases where the FDIC cannot find a buyer for a failed bank. The FDIC does find a buyer for more than nine out of ten banks that regulators close.

The low-key nature of bank closings also means that you can rarely tell in advance which banks are likely to close. Sometimes I can guess that a specific bank is likely to go under soon, but I will not say so directly except in the most extraordinary circumstances. The reason people in banking are so reticent with these opinions is that we don’t want to contribute to a run on a bank. A run can ruin an otherwise healthy bank, and it can hasten the demise and add to the costs of a bank that’s on the brink. Of course, I don’t want you to lose your money in a bank failure. If you have more than $250,000 in the bank, you need to have multiple banks. If you depend on money to function from day to day, you may need to be holding that much money in cash or otherwise outside of the banking system. You are less likely to be inconvenienced if your credit card is not at the same bank as your deposit accounts.

The hurricane that threatens the U.S. East Coast, with landfall expected Monday night or Tuesday, is the “S” storm, which means it is farther down on the list of tropical cyclone names than we usually go.

The hurricane’s name officially is Sandy, but I like to refer to it as “Santa,” in recognition of the Bah & the Humbugs song “Hurricane Santa.” That’s a song that depicts a late-season monster hurricane that, like Santa Claus, gets into houses via the roof. The song itself is a measure of the expansion in the hurricane season we have seen recently. Songwriter Paul Nordquist noted on Twitter:

When @thehumbugs first sang "Hurricane Santa" in 1994, it was preposterous to imagine the hurricane alphabet getting up to 'S.'

Back in 1994, everyone knew hurricane names came from the first half of the alphabet. Hurricane "Santa" was a joke.

But this weekend’s “Hurricane Santa” is no joke. Meteorologists have never seen anything like it, particularly when it comes to what all the forecast models agree the storm will do on Sunday. The hurricane is expected to merge with an Arctic storm (another reason why the “Santa” name fits) to form a massive hybrid hurricane-northeaster that could have tropical-storm force winds stretching from North Carolina to Maine. We don’t really know if the forecast models are right since, as I mentioned, meteorologists have never seen this situation before. But if the forecasts are approximately right, this could be the most damaging hurricane of the season, mainly because of the risk of tidal flooding and inland flooding from heavy rains (and possibly lake effect snow). The latest National Hurricane Center forecast puts the center of the storm at the Delaware-Maryland border late Monday night, but winds and waves will be affecting the coast well before then, and already, half of the East Coast is under tropical storm watches and warnings. Where I live in Pennsylvania, tomorrow will be the day people make preparations (which includes supplies like water and batteries), assuming the forecast holds up. By Sunday, the tropical-polar rain bands might already be here.

Thursday, October 25, 2012

Enterprise computing is still clinging to long-term planning even though it no longer makes any sense in today’s business world.

I know the long-term planning vibe is still very much alive from a recent Secret CIO column in Information Week. John McGreavy devotes an entire column to a rant against Google, eventually concluding:

Google, you have some great products. . . . but it will take some adjustment in thinking and approach to conquer the enterprise. An attitude adjustment wouldn’t be a bad start.

Poring over the fine print, the supposed attitude problem McGreavy finds in Google is its reluctance to make specific product promises more than six months out. This is what has McGreavy so appalled. If you can’t make commitments five years in advance, he goes on to suggest, you don’t belong in the corporate world.

People who aren’t privy to the world of corporate IT must have a hard time imagining the sense of entitlement that this view represents. What kind of delusion could lead anyone to assert the privilege of separating their efforts from reality for five years at a shot? It must be something like this: “I am the king of the world. If it takes five years for me to get out of bed and come down to breakfast, the world will just have to wait.” This suspicion is confirmed when you look at what corporate IT has done in the last five years and compare it to what Google has done. Just one point of comparison: The IT department is still forcing workers to use Microsoft Windows XP, an operating system that hasn’t been officially supported for nearly five years. Google, in the same period of time, has coded a new operating system from scratch and has more than 100 million people using it. So who has the more realistic view of the world of work? Indeed, the long-term plan is a big part of what prevents corporate IT from getting much done.

Of course, it is not just Information Week. Hewlett-Packard had people chuckling this month as it laid out its five-year turnaround plan. It was so funny because in the computer business, “five years” serves as a euphemism for “never.” The executives at Hewlett-Packard might as well have said, “HP will be profitable again when hell freezes over.” Despite the awkward presentation, Hewlett-Packard is serious about its five-year plan — for now, anyway. No one seriously expects the plan to survive intact for more than a few months.

You can’t plan your work five years in advance if you’re working in a rapidly advancing area of technology. Before you finish writing a plan, the world changes enough to render the plan obsolete. A five-year plan turns into a five-week plan. In practice, the long-term plans in computing are revised continuously, at enormous expense. So where did the five-year plan in information technology come from?

It makes more sense if you look back to the 1970s and the behemoth computers that dominated business computing at that time. A computer system might cost $20 million in today’s money to purchase and more than a year to set up and test. It would be expected to last at least 10 years. You can’t make that kind of investment without a long-term plan.

But a comparable computer of today costs about $5,000. You can easily sell it if you can’t find another use for it after you’re done with it, so you are not making a major commitment by buying it. The manufacturer can deliver it overnight if you are in a hurry. It can be set up and tested in less than a day. There is no need for long-term planning, no benefit in it, when technology comes in such small increments. Long-term planning in corporate information technology is a habit that has outlived its usefulness, yet it carries on, and it forces the entire enterprise to slow down to keep pace with it.

This is more than just an academic concern. If the multi-year information technology plan has become the anchor that prevents the enterprise from getting out of the harbor, then economically, one of two things will happen: the enterprise will cut the anchor loose, or it will sink where it sits. When the storm comes, my feeling is that most corporations will decide they want to stay afloat.

Wednesday, October 24, 2012

The new iMac blurs the lines between portable and desktop computers. The iMac is similar to a portable computer in having the computer built into the display. To use it, you have to plug it into a power supply and attach a keyboard and mouse, steps not required for a portable. The new iMac introduced yesterday is said to be 8 pounds lighter than the previous model, though, light enough that you could carry it around almost like a portable computer. The extra minute of setup would be an obstacle for someone who was actually traveling, but not such a big deal for someone moving from one desk to another within the same building. The lighter, simpler desktop computer lends a little more impetus to the trend away from permanently assigned desks in offices. Workers can still use desktop computers even if they are not working at the same desk all day long.

Tuesday, October 23, 2012

One of the surprise twists in last night’s presidential debate was the proposal of a new paperwork program for employers, which would require them to check new hires with a U.S. government database to ensure that workers are legally permitted to work in the country. This adds costs and risks to the hiring process, and it would tend to make businesses in general slightly more reluctant to hire.

It is not such a big worry for large businesses, which could afford to hire one extra worker to specialize in this new regulatory requirement. Yet even this represents an incremental cost to be charged to each department’s budgets whenever they hire a worker. For a small business, though, the new requirement would represent a new skill that someone, most likely the business owner, would have to learn. In the typical small business, that is the kind of task that tends to get postponed until tomorrow or next year — and the hiring along with it. Similarly, the requirement that a business have a web-compatible computer may be a deterrent — not for large businesses, obviously, but for some small businesses, which aren’t based in an office and may need to delay hiring paperwork until the weekend when they can get to a computer.

The greater concern, though, is the added risk of the database check. For most workers, the delay involved is less than half a day. But around 1 percent, incorrectly flagged as illegal immigrants, may have to spend weeks in additional paperwork to appeal the decision against them — a period of time during which they may not be able to start work. This delay is, again, not such a big deal for a large business, but in a small business where every worker really matters it requires a contingency plan for a possible one-month delay in every new hire. This just adds to the fog of contingency thinking that already surrounds every small business.

A more responsible approach would be for the federal government to reverse most of this risk by keeping an accurate database in the first place. But this would require a new government office or agency in Washington with several hundred workers to track down the facts about individual workers’ citizenship and immigration status. One has to be skeptical of the results. The inevitable result of a new round of hiring paperwork, then, would be a slowdown in hiring.

There is a limit to how much the government can turn every employer into its agent to enforce public policy initiatives. I would argue that the U.S. government has already gone well past the economically optimal point; employment regulations already create, on margin, more burdens on employers and employees than policy benefits for the public. When the burden of implementation is taken into account, not every policy a politician can think of can be carried out in the real world. Political leaders have to do better at picking priorities.

Monday, October 22, 2012

After Google reported disappointing revenue, Wall Street decided Google had a “Facebook problem.” Google ads, they said, didn’t translate well to mobile devices. For reasons that aren’t fully understood, click-through rates are much lower on phones than on computers.

This analysis, to my mind, overlooks a larger problem. Click-through rates are falling on computers too. It is not just a problem with mobile. Consumers are tuning out advertising in all interactive media.

In theory, people can disregard information just because, over time, they come to regard it as having low value. After years of reading irrelevant advertising messages, people eventually stop reading. But I think something else is going on here. It is not just that people are not reading the ads. They are actually not looking. They are intentionally blocking them out. This is not the result of lack of interest, but of active avoidance. It results from past bad experiences with ads. People avoid a repeat of these bad experiences by finding a way to not see the ads at all.

For advertisers, this is worse news than it might appear at first. After people have tuned you out, it is virtually impossible to get their attention in order to win them back. If people are not even seeing the ads in a particular place anymore, it doesn’t matter how clear or clever the advertising message is — it still won’t connect.

It is easy to imagine that everyone will have a series of bad experiences with ads in interactive media. Some ads are false, disparaging, infuriating, condescending. Google ads in particular can follow a target around in a way that could easily remind the person of stalking or harassment. These irritations don’t have to register consciously for people to develop a pattern of avoidance. Eventually, then, everyone will develop a degree of avoidance for online ads. And once learned, the habit of avoiding ads in a particular place may be permanent.

Advertisers would be humbled if they realized how thoroughly viewers can tune them out. I often see myself tuning out ads online, but I still notice, or I think I do, how many ads I am not seeing, along with their position on the page. But others may completely block ads out of their awareness. I spoke recently to a Gmail user who did not realize, until I pointed them out, that there were ads next to every Gmail message she read. She was so focused on her work that she was not even aware that there was other content on the same page. Similarly, I know that some of the readers of this blog have never stopped to notice the ads displayed in the blog. It is as if those parts of the page just disappear. No advertising message, however compelling, will get a reaction from a viewer like this. And because of the negative experiences people inevitably have eventually with advertising messages, this is the direction I believe we are all moving in.

Sunday, October 21, 2012

I am seeing a new pattern in traffic this fall. As sunset comes earlier, there are fewer people out in the middle evening. Traffic in retail areas in the middle evening hours looks more like late evening. On the other hand, daytime traffic is higher. I have come upon heavy retail traffic in daylight hours on the last two weekends. Yesterday, the longest lines were at Goodwill where people were buying costumes for Halloween. Restaurants that were packed in happy hour were thinning out by the middle of dinner hour.

The earlier nightfall of fall might have triggered this change, but it is not really the cause. I think there are four things going on.

There is a downturn in nightlife. This fall’s movie releases aren’t catching the attention of movie fans. Business is soft at bars and concerts.

Drivers are adapting to the high price of motor fuel by combining trips. Most of these combined trips are on the way home from work or on Saturday afternoon.

People are reserving time to communicate online in the evening.

Shoppers are saving up for Christmas.

Instead of being out on the town, people are out on the Internet. Part of the reason is to spend less money. Once you have learned to tune out the fog of advertising that permeates the online experience (see tomorrow’s post on this), you are less likely to spend money online than at any physical commercial place you might visit.

Friday, October 19, 2012

This month there have been reports of denial-of-service attacks on giant U.S.-based banks. Attacks have been confirmed at Bank of America, Wells Fargo, Ally Financial, and others, and there were surely targets we don’t know about. Targets of denial-of-service attacks cannot always detect the extra transaction load, and if they do, they may not be prepared to go public with the information they have. Defense Secretary Leon Panetta referred to the series of attacks in a recent speech on securing essential infrastructure, such as water supplies and railroads, from cyberattack. The most specific information comes from PNC, whose CEO James Rohr told CNBC his bank’s servers were “pummeled” for 38 hours and the threat of attacks was having an impact on operations.

Cyberattacks are a very real, living thing and if we think we are safe that way, we’re just kidding ourselves. It’s true throughout the country and in different industries, too.

Based on the information that is known so far, network software experts have assured me that the scale of the attacks on the banks has been greatly exaggerated. The real problem, they say, is what Panetta and Rohr alluded to in their comments, that banks are not used to thinking of their operations as potential targets for attacks. It is probably just as well that banks have put a greater emphasis in recent years on securing customer data from loss, as the denial-of-service attacks were almost certainly coordinated with break-in attempts that would exploit software flaws in overloaded servers in order to gain access to account numbers and other sensitive data. Those attempts would fail if the files in question were adequately encrypted.

The financial incentive for this kind of large-scale break-in attempt is centered in the organizations that are already involved in high finance, such as Wall Street banks and sovereign wealth funds, but it is hard to imagine any of them attempting something so disruptive. There has been official speculation that the attacks might originate in Iran, and the theory of a hit-and-run attack from a spiteful foreign government can’t be completely discounted.

The banking giants have reported better-than-expected earnings for the latest quarter, but investors are taking the earnings reports with grain of salt, and for good reason. The reported profits are based in part on projections of a steady increase in real estate values over the next two years, a hypothetical trend that other economists dismiss as unlikely. A wave of home mortgage refinance activity also contributed to some banks’ profits, but that refi boom may have ended already, and the resulting mortgages add more risk to the banks’ already awkward balance sheets.

There has been more political talk of reining in the giant banks. It was the RBS acquisition of failing Dutch bank ABN Amro in 2008 that brought RBS to the brink of insolvency and led to a taxpayer-funded bailout. Now a parliament report is saying the Financial Services Authority (FSA) could have blocked that acquisition. The report calls for the new Prudential Regulation Authority (PRA) to consider the financial impact of every bank merger, and for legislation to ban some kinds of mergers, particularly hostile takeovers of banks by owners of other banks. In the United States, two senators have sent a letter to regulators calling for higher capital levels than the latest international treaty requires. Separately, former FDIC chief Sheila Bair has explained how Citibank could have been broken up in 2008 or 2009, preventing some of the stress that has happened there in the years since.

Spain is expected to formally request a bank bailout at this weekend’s European summit. No action is expected on the request until next year.

Update: Based on where we are in the political calendar, I wasn’t expecting bank closings, but one popped up almost as soon as I posted. State banking regulators closed GulfSouth Private Bank, with $151 million in deposits and four offices in Destin, Fort Walton Beach, Pensacola and Santa Rosa Beach in the western Florida panhandle. Deposits are being transferred to Tennessee-based SmartBank, which is also purchasing the assets.

The Treasury lost 90 percent of its $7.5 million TARP bailout of the failed bank.

The second bank closing at closing time was First East Side Savings Bank, with one location in Tamarac, Florida and $66 million in deposits. The deposits are being transferred to Minnesota-based Stearns Bank, which has acquired a number of failed banks over the last two years.

In Missouri, state regulators closed Excel Bank, with $187 million in deposits and four locations. Simmons First National Bank is taking over the deposits and purchasing the assets.

A decade with more drought than flood has left Lakes Michigan and Huron barely above the lowest water level ever recorded there. Warmer than average air temperatures and record-high water temperatures also contribute to the water loss by evaporating water faster from the surface of the lakes. Official forecasts predict that the water level will fall to match the record low through the end of the year, then fall lower for at least the first four months of next year. Then spring rains could begin to lift the water levels. However, such large lakes don’t move very quickly, and it would take years of above-average rains to restore the lakes to historical levels.

The low water levels are more of a worry than an inconvenience at this point, but shipping could be adversely affected if the water levels continued to drop in the coming years. All the Great Lakes are below normal levels. Lake Erie, downstream, is the shallowest of the Great Lakes and could be the first to see obvious changes if water levels continue to fall. Farther downstream, Lake Ontario is at low levels for this time of year. Both of these lakes could fall lower if there is less water coming in from the lakes upstream.

Thursday, October 18, 2012

From the latest EU summit, a sign that the euro may be on the way out: a German call to give the EU the political authority to veto national budgets.

Supposedly the economics commissioner would only reject budgets that violated EU rules, but in practice, no political power of this magnitude is used in a completely orderly way. The authority to shut down a whole country’s government — which is potentially the effect if a budget is voided — is obviously greater than the authority any past individual or board has been entrusted with. At the other end of this hypothetical transaction, one doubts the response of a country such as Ireland or France if it is ordered by foreigners to shut its national government down, even for a day. The reaction would likely not be consistent with the Nobel Peace Prize that the European Union just won.

One of the great ironies of the proposal is that Germany itself has not kept to the rules it is now seeking to enforce. Imagine the outcry if the EU vetoed the German budget, yet what is to stop that from happening?

How could the German government propose such an unworkable and dangerous political mechanism? It can only be taken as a sign that Germans are getting weary of the troubles of the euro zone and may now be willing to give up the economic privileges the euro has given them in return for being able to wash their hands of it. But if Germany’s involvement in the euro is becoming one of reluctance, it is hard to understand where the impetus for a consensus solution to the euro zone’s current and future problems could come from.

Wednesday, October 17, 2012

“Of course the numbers add up,” Mitt Romney said during the presidential debate last night. It was his way of refusing to answer a question about how he might respond to a shortfall in his financial plan for the U.S. government. He went on to say that in his experience in business, the numbers always add up.

That last assertion is not something anyone who ever ran a business would be able to say. Even freelancers, who run the smallest businesses there are, know that business never works out the way you draw it up. It is your customers who ultimately determine how much revenue comes in. The outside world also has some influence on your costs, so you can’t expect to control those perfectly either. This is why no business plan ever translates perfectly to reality.

Businesses don’t make things work by planning every detail in advance. They plan as well as they can, but then they adjust to circumstances as they go along. And when the numbers don’t add up in a business, you typically:

seek additional financing

start making cuts, such as closing facilities, selling assets, and laying off workers

Romney’s financial plan, in truth, doesn’t add up. Everyone who has looked at it agrees it comes up trillions of dollars short. And so the question Romney refused to entertain during the debate does need an answer. The answer of necessity follows along the same lines that anyone can observe in a struggling business, but on a larger scale than any business would have to consider:

trillions of dollars of additional financing in a combination of higher taxes and increased government debt

trillions of dollars in cuts, which could include things like closing military bases and selling off military aircraft, canceling purchases, and laying off workers

The old rule of thumb in business planning is that $1 million in a budget covers about 10 workers. Closing a budget gap in the trillions would mean job cuts by the millions. That’s something everyone should envision when they look at Romney’s plan.

Romney can’t talk about millions of layoffs in a campaign that has “more jobs” as a theme, which is why he couldn’t answer the question. Imagine how it might have sounded if he had said in his chuckling Reagan imitation, “Well, Candy, it’s the same as in business — that’s when we start laying people off. And if the experts are right, why, we’ll be looking at more Americans without jobs than ever before.” That would be the right answer factually. Romney probably even knows that answer. But being a politician means not saying it.

Tuesday, October 16, 2012

Is the PC era ending? That question is the subject of at least one news story every day. The frequency is increasing now with leaks and speculation about Microsoft Windows 8. It seems Microsoft is not counting on a mass shift to the tablet, but hedging its bets with the release of an operating system that is equally awkward regardless of the hardware form factor.

Microsoft’s hedging points to something meaningful: it doesn’t really matter very much anymore what shape a computer takes. You can create documents, write, issue commands, and see results on any screen. The future of the PC, then, very much depends on the future of the desk. How many people will continue to work at a fixed location, sitting down at the same furniture day in and day out? If that is the usual pattern, the desktop computer has the obvious advantages that come with being designed for that setting. But it is hard to guess at this point how much inertia the office-desk-phone-PC pattern really has.

Monday, October 15, 2012

Yesterday was a day for the history books. It was more than just a record-setting jump and the prototypical space jump. It also helped bridge the gap between Earth and space.

No one ever before went to an altitude of 39 kilometers and then sat there. It is a difficult place to visit. The problem is air. There is no air to breathe, not enough to support a sound wave or an airplane, but too much to permit an orbital craft. This, then, is the gap between Earth and space that prevents us from thinking of outer space as part of our neighborhood. Just seeing it on camera and seeing one person in a pressure suit within the environment there is enough to serve as an introduction. It is no longer so completely unknown.

There is one more major barrier between Earth and space, and that is a matter of speed. An object in a decaying Earth orbit can perhaps be moving as slowly as 5,000 meters per second. For someone to be able to jump from an orbital platform and land on the ground — the ultimate promise of space jumping — there must be a way to slow to a speed that permits a stable free fall in the stratosphere. Yesterday’s jump shows that 1,000 meters per second is probably slow enough. There are theories about what kind of simple lightweight device could create atmospheric braking to slow from 5,000 meters per second to 1,000 meters per second while encouraging a stable descent. After yesterday, these ideas seem that much more plausible.

The space jump was a huge media event, with more than 6 million live viewers on YouTube alone. I am sure that thousands of people who saw the jump are now inspired to attempt the same feat themselves, in spite of the obvious risks. This is not as preposterous as it might sound. The enormous expense of Felix Baumgartner’s flight was not the jump, which was fundamentally carried out using existing designs for a pressure suit and parachutes. It was the ascent that was so difficult. Engineers have been working for a generation on suborbital spacecraft designs that will eventually make this trip easier to accomplish.

Already, though, outer space doesn’t seem so far away, and that is perhaps the most important result of yesterday’s jump.

Sunday, October 14, 2012

It is not to soon to look back at the dire predictions from this year’s drought in central North America. In August, it was not hard to find experts to say that the U.S. corn crop had been decimated; that food prices would double; that by 2013, there would be food riots worldwide.

None of that will happen. After all the fuss, the United States as a whole is turning in a near-normal corn crop. Yields in Iowa are now projected to be down about one sixth from last year, remembering that last year was a pretty good year. Yields in the Ohio Valley are down by a third, but even that is within the normal variation for a field of grain. Minnesota is actually doing better than it did in last year’s floods.

Corn prices are higher but I can’t find any indication that beef and pork herds (that’s where most of the corn goes) have gotten much smaller. Prices for beef and pork will surely be higher throughout next year, but not enough to create sticker shock for supermarket shoppers. It is important to remember that meat prices had been trending higher already before last year, so the latest increases are really nothing new or surprising. Meanwhile, for corn growers, the current high prices for corn take away some of the financial impact of the low crop yields. U.S. corn is still in a surplus position, according to USDA, though the surplus is a third of the usual amount and may vanish completely before next summer.

Even my own worries turned out to be exaggerated. If this summer’s weather is an indication of what we can expect in the future after the Arctic sea ice is gone, farmers will still be able to grow corn in the central United States. It might not be quite as lucrative as before, but farmers can reduce the impact of a drier climate by picking a corn variety better suited to the new climate.

The financial consequences for producers are more important than the effect on consumers. Beef and pork producers are being squeezed and may barely break even for the next eight months or so. The squeeze extends to restaurants, which were already being affected by rising meat prices. Some restaurants have already closed this fall, complaining of high prices for beef. Others are shifting their menus around, taking most of the corn-heavy products off the menu.

The consequences for ethanol plants are similar; they operate on very thin margins in good times and some have been idled as they wait for lower corn prices (or higher fuel prices) in the future. Yet if this is a disappointment for the plant owners, it makes good economic sense. Corn ethanol plants probably should operate mainly in years when there is an excess crop. In those years, they can help absorb the excess production, which otherwise (in extreme cases) might go unused. That reduces the risk of low prices that growers face in high-yield years. For now, the reduced ethanol supply will put upward pressure on gasoline prices.

Friday, October 12, 2012

Is the U.S. housing market “turning around”? That is a subject being examined this week as both JPMorgan and Wells Fargo reported healthy-looking earnings based on the premise of increases in home values and home building. My own opinion is that home building will have to decline from current levels in most areas and that real estate values are not likely to increase or decrease by much over the next 14 years. Analysts and traders who adopt this view say that JPMorgan’s latest earnings number probably can’t be repeated, and the stock fell off 1.5 percent after the report. I worry about how sensitive some banks’ earnings are to the state of the real estate market. If rumors of a turnaround in real estate make this much of a different in earnings, what will rumors of a decline do?

Bank of England deputy governor Paul Tucker commented about the political risks of another bank bailout. It is such a sore subject with the public, he said, that legal changes were needed to make it impossible for future bank bailouts to be government-financed. “If there was to be another financial crisis, once we have got through this one,” he said, “and there was a need to bail out the banks, I think the backlash would be uncontainable.”

In the United States, giant banks with $50 billion in assets or more are conducting ongoing stress tests already. For other large banks with at least $10 billion in assets, the stress tests will have to start in 2013, regulators have decided.

The “cyber-Pearl Harbor” scenario Leon Panetta spelled out yesterday was an exaggeration, but the policy changes he was calling for were the right idea. To the extent that traffic lights, rail and power switches, pipelines, drawbridges, medical scanners, and other potentially damaging equipment is connected to the Internet, it should be protected from intrusion, to a standard higher than that of the often-porous security of most of the Internet. It defies our usual intuition that a small local water system with no full-time staff may need the same kind of network security that the Pentagon employs, and this is one of the reasons Panetta is sounding the alarm bells.

Panetta specifically mentioned the financial sector. He took the recent denial-of-service attacks against international banks out of context in perhaps a misleading way, but the financial sector is an obvious target for criminals even if it seems to have held up well so far. The lax and fluid security of financial networks will eventually allow a criminal organization to bring down one of the major transaction systems. It is the credit card transaction network that is most vulnerable because of its broad reach. Sometimes I marvel how it has held up this far, after billions of identifying numbers and codes have been leaked onto the Internet or have fallen into criminal hands by other means. On any given morning there is a small chance that you could wake up to the news that you can no longer use any of your credit or debit cards except at your own bank. Or, your bank accounts could be temporarily inaccessible, as a million people in the north of Britain discovered earlier this year. It is worth taking a few moments to consider small steps you could take to minimize the inconvenience that would result.

Thursday, October 11, 2012

Wonder Bread and the National Hockey League (NHL) are waiting to find what the future holds.

Hostess Brands, the commercial baker that makes Wonder Bread along with Twinkies and a dozen other familiar junk-food brands, has filed a partial reorganization plan with bankruptcy court. There are large gaps in the plan that would be expected to get further court scrutiny. Probably the new plan is just a placeholder, meant to show that the bankrupt company is making progress and has a hope of getting to a comprehensive plan that would allow it to emerge from bankruptcy next year. The plan calls for an immediate 8 percent wage cut and drastic cuts in health benefits. In return, the workers become debt-holders with a $100 million bond.

The NHL team owners voted to shut down before the beginning of the season. They hope to come to a new labor agreement that would allow the league to continue operating without the risk of large losses. Talks with the union broke off, but resumed a few days ago. No one seems very confident that the outline of a deal can be reached before early January, which would be the latest that a credible shortened season could get underway. If that doesn’t happen, the league will miss a year, but the league and union surely can come up with a plan in time for a regular start for next season.

In both stories, there are reasons to be skeptical. There are reasons the old plans came up short, and those are not being addressed. Time is working against Wonder Bread, as consumers move toward real food and more respectable food ingredients. Time is also working against the NHL, whose game action doesn’t look so pretty or profound on the large-format, high-definition displays that the U.S. TV audience is moving toward. Alas, the clock keeps ticking while you stop to come up with a new plan. Time spent in bankruptcy or lockout is time not available to try to align with changing consumer tastes. The accountants at Hostess Brands and the NHL are trying to fix the gaps in the business plans that failed in 2011. But a patched-up 2011 plan may still end up losing money in the shifting market realities of 2013 and 2014.

Wednesday, October 10, 2012

War isn’t what it used to be. Around the world you find countries that are obviously or even formally at war, but trying to minimize the war story while making a show of normal life. As an extreme example, a Reuters story this morning describes a Facebook photo from Syria:

it shows the first lady Asma, dressed in jeans and a t-shirt, accompanying her daughter and three sons on their first day back at school.

The schools are barely functioning in a country where basic government services broke down six months ago, so the back-to-school photo has meaning on two levels. At the deeper level, it works as a show of defiance. You can’t force us to acknowledge that the norms of everyday life are breaking down.

Varying degrees of denial are seen in other countries. In my own country of the United States, many of my friends have forgotten that the country continues to be involved in a war, despite the enormous costs and the consequent economic troubles. Casualty reports come in on the news wires, but no longer sink in. It is a subject politicians won’t discuss voluntarily or directly.

It is a far cry from what we saw seven years ago, when war was almost the only thing in the political news. Then, the White House would talk about war on a daily basis. But that brief period was a throwback. Going back a couple of centuries, war was fought with earth-shaking drumbeats and trumpets blaring. Political leaders made extravagant promises about the benefits of war. They declared war based on rumors. By the late 20th century, the trumpets were metaphorical. Political leaders cautioned about the risks of “armed conflict,” no longer officially considered war. Now there are no trumpets at all. Move along, there is nothing to see here.

Perhaps it is a sign that war has lost much of its popular support. Often in political change, rhetoric precedes reality. Possibly that is the case here. If leaders can no longer talk openly about the wars they are conducting, that does at least take away some of the old incentives to go to war.

Tuesday, October 9, 2012

Yesterday I saw headlines about General Motors’ plans to hire 1,500 computer technology professionals. On the surface, it sounded insane. This morning I looked into the story and found that this is part of a plan to hire 10,000 computer professionals over a five-year period. Insane six times over.

I know General Motors likes to think of itself as the largest company in the world, but there is no company large enough that it could legitimately plan on needing 10,000 computer geeks — right?

Perhaps that is a reasonable reaction in my idealistic mind, but the way the corporate world works in practice, this “crazy” plan may actually be a step forward. Large-scale projects have diseconomies of scale, so they need more than a proportional number of workers. This is especially so when it comes to computer work. Maybe 10,000 engineers is not such a crazy number. The $2 billion annual cost for these tech centers (that’s my rough estimate of the operating expenses) will replace more than $1 billion that General Motors currently spends to get computer-related services done by other companies. By insourcing, General Motors will save administrative costs, which are always increased with an outsourcing approach. At the same time, it may end up reducing the security concerns that arise when the company’s most valuable designs and information are in the hands of hundreds of third parties. The company could plausibly undertake an Apple-like secrecy on some development projects, if it chose to, and get a three-year head start on competitors. Perhaps that is a larger consideration than the costs involved.

In general, any expansion plan can succeed if it is implemented well and costs and revenues are kept in balance. One advantage General Motors has is its eastern Michigan location, where hundreds if not thousands of qualified computer professionals struggle to find work. It remains to be seen how well its tech centers will do — so even if I balk at the scale of the initiative, I can’t argue with the core idea.

Monday, October 8, 2012

When it comes to economic reforms, how fast is too fast? The question of the practical pace of reforms comes up after this statement from U.K. finance minister George Osborne (as quote at Reuters):

We’re reducing the size of government from almost 50 percent of our national income to just 40 percent in just five years. I just don’t think it’s realistic to cut a great deal faster than that.

On the surface, it would appear that the Conservative Party government is already making cuts faster than the economy can absorb them. A healthy Western economy can keep up with exogenous large-scale institutional changes to the extent of about 1 percent of GDP per year. The rate is higher in a good year and in good circumstances, or lower when there are other stresses, but the 1 percent rate works as a rule of thumb. Based on that, Osborne’s plan can be expected to cause unemployment to increase by about 4 percent in 5 years. A slower approach would cause less disruption and therefore could reach the same goals faster.

In theory, transitions can happen several times faster with narrowly chosen short-term central economic planning. Given the degree of institutional corruption across major economies, though, no one should expect this approach to work consistently. China and Argentina serve as current examples of the high costs of large-format reforms sponsored by corrupt central governments. India and Russia, by contrast, have at least the same level of corruption, but have managed to steer clear of the worst economic disruptions by enacting reforms on a much more timid scale. Brazil is an interesting case where, in spite of obvious problems with corruption, faster reforms have taken hold successfully, not just right now, but more often than not since the 1990s. How do they do it?

Sunday, October 7, 2012

The commercial news media is tired of global warming stories. They haven’t given much credence to this year’s Arctic ice melt records because of the likely connection between Arctic ice and global climate. This is a shame. Global climate change might be a scientific inquiry and an associated political policy dispute, but ice melt is something that can be directly measured and photographed, and it is important in its own right. It may not make for the hours of compelling low-budget television that you can get from a good hurricane, but you would think they could give the Arctic Ocean and Greenland two or three minutes before jumping off to the political side of the global warming story. The fact that they mostly did not do so shows that the corporate people are worried about stories that may directly confirm climate change in any form. Read more about the way these stories are buried, at Truthout:

There are many ways to emphasize just how emphatic this year’s change in the Arctic sea ice has been, and I have already mentioned several. Here are a few more: Arctic sea ice extent stayed below the previous all-time record low for the entire month of September, along with the end of August and the beginning of October, six weeks in all. (I am extrapolating that new freezing brings it above the old record any day now.) September extent averages have set new record lows in four of the past ten years. September ice extent has declined by half compared to ten years ago. September ice volume has declined by half compared to five years ago.

When will the ice on the open Arctic Ocean all melt away? On September 9, 2016. That is only a forecast, of course, and a naive one at that, but the point is, that day is so close that it is no longer ridiculous to start trying to forecast it — and it is certainly time to start preparing for it.

Friday, October 5, 2012

Suppose climate change is already happening. How might that affect banks? To take a specific example, suppose this year’s drought is an approximation of the new summer weather pattern for 16 states, as some climate scientists have theorized. These states would no longer be places where you could grow crops like corn without irrigation, and that change in the economic base would affect real estate values and business prospects across the entire region, potentially resulting in more than $1 trillion in unpaid bank loans. Are banks prepared for this kind of regional stress? Banks that have real estate loans entirely within the affected region might fare the worst, but are there less obvious effects that could put financial stress on banks?

Iran is in a full-on currency crisis, with the government taking to the streets to rein in the underground currency trade. The rial fell by about 20 percent in three days this week. Prices for consumer products increased more rapidly than that, forcing many shops in Tehran to close for one or two days. Iran’s government must take more control of ordinary banking to try to prevent an extended bout of hyperinflation.

Iceland’s economic growth is continuing nicely four years after its banking crisis, and its central bank released a report saying the financial condition of its banking system is improving. Iceland’s people-first approach to its banking crisis confounded the world’s financial experts and infuriated allies such as the United Kingdom but has proved less stressful than the approaches taken in the United States and Europe. Iceland still wants to join the European Union, but will probably not attempt it within the next ten years, given all the uncertainties of the current situation.

More than a million people turned out for rallies across Europe last weekend urging “No” votes on the euro zone’s proposed austerity treaty.

In the presidential debate focusing on the economy, candidate Mitt Romney promised to repeal many of the regulations that he says are crippling Wall Street. He specifically suggested that underwriting rules that prevent banks from lending to unqualified buyers should be rolled back. On the other hand, Romney indirectly criticized the Wall Street bailout, noting that it had contributed to a few of the hundreds of bank failures of recent years. For his part, incumbent Barack Obama hinted vaguely at a tougher stance on Wall Street, with changes needed to reduce the risk of market meltdowns.

Customer accounts holding more than $100 million in assets from bankrupt futures broker Peregrine Financial will be moved to Vision Financial Markets, according to a plan filed with bankruptcy court. Vision Financial Markets is familiar with the process that will be required to convert the accounts, having previously acquired accounts from the failed MF Global. Vision Financial Markets is paying a premium of about $20 per account for the accounts it is acquiring from Peregrine Financial.

A credit union was liquidated last weekend. El Paso’s Federal Credit Union had 1,000 members and $5 million in deposits. Some qualifying accounts were moved to El Paso Area Teachers Federal Credit Union. The NCUA sent checks to other members for their insured accounts.

When we talk about “clean” coal, it is a relative term. All coal produces heavy pollutants and atmospheric carbon by the ton when it burns in a power plant. “Clean” coal produces more atmospheric carbon and less heavy pollutants because of the way it has been washed before burning. The trouble, of course, is what happens to the water and detergents that are left over from the washing process. This is an unsolved problem every bit as vexing as nuclear waste.

The by-product of washing coal after it is mined is an acid and highly toxic solution called coal slurry, though it is better described as sludge after some of the water has evaporated away. Mining companies fill whole valleys with lakes of coal slurry, held behind dams that aren’t built to the usual engineering standards of an earthen dam. The inevitable result is a long series of well-documented disasters as these dams break. Usually, of course, the dams hold, and the sludge eventually dries and forms a relatively stable, though still highly toxic, solid.

It is a horrendous answer to the problem of coal sludge, but it is the best we know of. Coal slurry is too acid to be held in tanks, acid enough to eventually destroy any tank used to contain it. Sometimes coal slurry is dumped back into coal mines, where it seeps into the ground water and may destroy all underground water supplies in the local area. That is a problem so costly that regulators are talking about completely banning this approach. Known industrial techniques for drying coal slurry release much of the acid and toxic minerals into the atmosphere, largely defeating the purpose of washing coal in the first place.

All known techniques to handle coal sludge safely are hugely expensive. There are similar problems with the other local by-product of coal, the coal ash that results when coal is burned. Coal ash holds most of the same poisonous materials found in coal sludge (though in quite different proportions). Coal ash should be buried, but often is dumped into the same reservoirs that hold coal sludge. If we took the trouble to handle coal sludge and coal ash safely, coal would no longer be a “cheap” fuel, but would be more expensive than oil as a source of electricity. That’s why we live with the risks associated with artificial lakes filled with the toxic by-products of coal.

In truth, coal-based electricity has been more expensive than oil all along. It is less expensive to electricity users only because many of the costs have been shifted onto the community at large. In the long run, we have no choice but to make the transition from coal to less costly sources of energy.

Thursday, October 4, 2012

For a few minutes in last night’s presidential debate, the two candidates were discussing the financial reform law. It was a moment that highlighted all that is wrong with the American political system: the incumbent trumpeting the very timid reforms as an important accomplishment, the challenger declaring it a disaster and vowing to repeal parts of it without appearing to understand either the parts he would repeal or the parts he would leave standing. Neither Obama nor Romney seems to have figured out that the current economic circumstances are different from what we saw in the 1970s and 1980s, so they are not really qualified to pontificate on the state of the national economy in the first place, but to make matters worse, their thoughts were so abstract it was hard to say what any of it really meant. It was painful to watch.

Romney is not a numbers guy and easily confuses millions, billions, and trillions, a point that struck home when he proclaimed, with more conviction than anything else he said all evening, that he would balance the budget by canceling Sesame Street. For those not familiar with it, Sesame Street is almost the longest-running program on U.S. television, a low-budget early education program that combines live action, animation, and some iconic puppets, including a large yellow bird called Big Bird. “I love Big Bird,” Romney said, as he hastened to add, in so many words, that sometimes you have to kill the ones you love.

The non sequitur of confusing the scale of a TV show budget with that of the federal budget took Twitter by storm and was the most discussed topic from the debate for the remaining hour of the debate and afterward.

Romney supporters worried about all the attention Sesame Street was getting. “Seriously? You guys are talking about a TV show?” But it was that moment that best symbolized the debate. Most of what the candidates said on taxes, jobs, and banking regulation was vague and, in Romney’s case, contradictory, but Romney was clear, specific, and passionate when he talked about firing Big Bird. It was the moment that stood out.

Romney likes to frame issues in terms of stark choices, and whether he meant to or not, he introduced just such a split in the debate. You have to choose between Wall Street and Sesame Street, he told voters — and there was no question that Romney assumed voters would support his decision to throw a few new favors in Wall Street’s direction while he simultaneously demolished Sesame Street.

I am not so sure that was a good political calculation on Romney’s part. First, he vowed that if he is elected, you will never see Big Bird again. But a television show does not last for nearly half a century without having its fans, and it is easy to imagine a few million voters asking themselves if they really want to vote to kill off some of their (or their children’s) favorite TV characters.

Second, the specific focus on an educational program seems to indicate a belief that early childhood education, and by extension all education, is too unimportant a matter for the government to be involved with. Many voters will disagree with Romney’s priorities in this area.

Third, the United States is prosperous enough to have both Wall Street and Sesame Street. The last half-century of our history is proof that it can be done. When Romney sets up a choice between Wall Street and Sesame Street, it is a false choice. It is a reasonable answer to say that you want to have both. Even if voters accept the premise that they have to choose, I am not so sure that a majority would choose Wall Street over Sesame Street as readily as Romney did.

Fourth, when Romney talked directly about “firing” Big Bird along with the debate’s moderator, Jim Lehrer, who anchors a news show that Romney would also cancel, it plays into the simplistic narrative that Romney’s whole career has been about cost-cutting in the form of job cuts. The fact that this was the one moment when Romney really sounded sure of himself does perhaps suggest that job cuts are the one thing he is actually good at.

Last night’s debate was Romney’s last chance to define himself and his candidacy to voters. This was something he had somehow failed to do in the primary season, at the convention, on his campaign web site, or in his attack ads. He could have said anything he wanted. What he chose to say is that he wants to fire Big Bird. And that, I am afraid, is likely to be remembered, subliminally at least, as the defining policy of his campaign.

Wednesday, October 3, 2012

Iran’s currency, the rial, has dropped sharply since last week. The central government is intervening to stabilize the currency. In Tehran, that means trouble in the streets and tear gas to try to disperse the crowds.

I have a hard time getting any reliable information on the currency dynamics involved. It is easy to find theories, including the president’s talk of the “psychological pressures” of an “economic war,” but among all the theories I have seen in the press, none ring true.

If the cause of the currency decline is not obvious, the solution is less so. The government is looking for answers out on the street. Police today stepped up pressure on shopkeepers to reopen shops closed because of fear of protests against rapidly rising prices, combined with the currency uncertainty itself. Some shops have reopened, but with thinner inventories than usual. Meanwhile, the government is trying to gain a greater degree of control over the currency-exchange process at the street level, where exchange rates have not always maintained any connection to the international markets in recent days.

My best guess is that the real problem in Iran is the growing gap between production and standard of living. Iran for decades has promoted population growth while harassing its economic base. Productivity has suffered, and production of food and consumer goods especially have not been keeping up with the growth in population. Even without knowing the specific mechanisms at work in the currency markets this week, they ultimately cannot be too far removed from the fundamental diverging trends in Iran’s economy.

Tuesday, October 2, 2012

The current state of the global economy is often referred to as a debt crisis, but in economics, there are two sides to every market. You can’t have chefs without farmers, or factories without workers, or trucks without roads. The other side of borrowing is lending, and the ultimate basis of lending is saving. The debt crisis, then, can also be seen as a crisis of saving.

This is the opposite of what common sense tells you. We always hear that people are not saving enough, and in a very real sense, on an individual level, that is true. But the larger problem is the amount of money people are trying to save. If everyone were to save as much as they wish they could, the global financial system would fail. Indeed, the point of failure is already uncomfortably close.

It is important to understand the proportions involved. In the United States, financial planners recommend, for those who have the financial means, a retirement fund of $3 million. That’s what it takes to maintain a prosperous, upper-middle-class, not-quite-wealthy lifestyle through retirement, allowing for the possibility that you may live as long as you can statistically expect to. The average American hopes, through some miracle, to be able to retire in this fashion. The average American would certainly save this kind of money if this could easily be done.

But it is economically impossible for everyone to save this much money. Soon there will be one third of a billion Americans. If everyone had a full retirement fund saved, the total savings would be one quadrillion dollars.

It is hard to explain the scale of $1 quadrillion. It is hard, first, because of the magnitude itself. In the United States, we have only recently learned to consider issues of $1 trillion without trembling. One quadrillion dollars is one thousand times that. But even when you understand the magnitude, one quadrillion dollars is hard to understand for a different and more fundamental reason.

To put the problem very plainly, there isn’t that much money. Not really, not in the sense of money that you can spend right now. The world is prepared to deliver not much more than $2 trillion in goods and services at any one time. That capacity sets the limits on the amount of real, active money there can be. There is possibly $2 trillion in real, spendable money worldwide. Any money in excess of this exists only because we aren’t all trying to spend it at once. The actual amount of money is considerably larger than this, an order of magnitude larger, but it is possible for that money to exist only because we are systematic, orderly, and predictable in the way we hold money before we spend it. Anything that interrupts that flow, then, can become a crisis of money. The more money that is saved, in proportion to the world’s productive capacity, the more easily such a crisis can occur.

So if there is only something like $2 trillion in real, spendable money, how can we ever save $1 quadrillion for our retirement? Well, we can’t. It is as simple and as stark as that. Worse, the more we save, the more top-heavy and fragile the financial system becomes. And then, anything that abruptly changes people’s view of money or otherwise shakes up the way people handle their money can create a crisis.

And the situation is worse than what I have laid out so far. It would take $1 quadrillion to fully finance the retirements of people in the United States. What about the rest of the world? For that matter, what about the sovereign wealth funds, billionaire-investors, and criminal enterprises? They all want to save money too. One way or another, the world is well on its way toward $1 quadrillion in savings, and there is no easy way around it. We can’t sort it out by making minor adjustments here and there. Suppose Americans voluntarily decided to live on the edge of poverty in our retirement years. That would reduce the U.S. retirement savings load only by a factor of about 8 from the imagined ideal. That adjustment is not nearly enough to bring retirement savings within the realm of real money.

So what are the consequences of the quadrillion-dollar retirement savings load? These are some of the more immediate, obvious, and colorful ones:

Low interest rates. Currently, interest rates are near zero. You should not plan on them going up before you retire.

A perpetual state of financial crisis. The savings load isn’t going away, so the financial crisis will not go away either.

Savings wiped out. In theory, much of our $1 quadrillion in savings is insured or hedged in some fashion. But if the amount of real money in the world is only on the order of $2 trillion, how real can the insurance be? Given the leverage involved in the financial system, it is not hard to imagine an institutional crisis of a scale large enough to wipe away not just one retirement fund, but an entire country’s retirement savings.

Price spikes and bouts of hyperinflation. A world that has $2 trillion in real money and close to $1 quadrillion in phantom money faces the risk of unpredictable shortages and price increases whenever people in large numbers try to convert their phantom money into real money. This can happen just because masses of people lose confidence in an institution or otherwise change their opinions of money in some way. Yet price spikes could reverse just as abruptly if opinions change again.

New currency. A financial crisis on a large enough scale could wipe out a national government or render its money worthless. Yes, this could happen in your country too. There is a very real chance that the currency you use now will be abandoned in your lifetime.

High prices for real estate and gold. People who cannot spend their “phantom” money in any useful way on goods and services will elect to spend some of it on unproductive but scarce resources that they hope will convey some privilege in the future. This kind of spending will drive up the prices of various assets, including real estate and precious metals, especially gold.

As far as I can tell, the quadrillion-dollar savings crisis is completely unavoidable. For two centuries, since the dawn of the industrial era, we have managed economic matters with the understanding that any problem in economics or finance could be overwhelmed by economic growth. This is the approach that has rescued the government-sponsored retirement systems up until the present, but no one really believes it can be pushed much farther. The savings crisis does not lend itself to this kind of thinking at all. Indeed, as individuals become more prosperous and shift their financial focus farther along the continuum from labor to savings, the savings crisis gets worse. But this is so counterintuitive that it may take a generation of ongoing financial turmoil, or an actual worldwide financial collapse, before leaders consider that a different solution is called for.

That solution, when it comes, will restructure things to put less pressure on the financial system. Our current consensus idea of retirement will have to give way, which also means our idea of work will have to change in a fundamental way.

On an individual level, what can we do? I wish I had more answers than I have. I can do little more than repeat the same advice I have offered for years. The ability to work, which essentially means staying in good health, is the most valuable thing you can have. Education is important. It is important to have friends.

There will be financial answers too, and I have some thoughts about what those might be, but it is perhaps a bit beyond me to try to spell them out here today. I must add, though, that no one should imagine that a financial collapse, if one should occur, would lead directly to an economic collapse. As long as most of us are able to work and we do not lose sight of what is needed to take care of each other, the economy will carry on.

Monday, October 1, 2012

I didn’t see them myself, but I heard reports of the holiday-season displays coming out of the boxes over the weekend. Today is October 1, the day when U.S. retailers traditionally begin showing Christmas-themed merchandise, even though they don’t expect sales to reach significant volume until after Election Day, which this year is November 6. One marketing theory that drives this strategy is that people get used to seeing the holiday merchandise before they start buying it.

I wish I could say this looks like a more favorable Christmas shopping season, but instead, at this point, it looks as if retailers are overconfident again this year. Some signs of this:

The big product push for Christmas 2012: corduroys. Gap, Target, and others are betting that shoppers are so sick of practical clothing that they are ready to pay jeans-like prices for something childish, frivolous, and uncomfortable. They make it sound like a good theory.

Larger seasonal hiring plans than in any of the last five years. Estimates and announcements at this stage aren’t necessarily accurate, but we may be looking at more than 1 million temporary retail jobs.

Retail analysts are brushing off this year’s decline in consumer electronics, saying that lack of interest won’t carry over to the gift-giving season. Yet no one really knows why electronics have lost their shine, so there doesn’t seem to be a basis for predicting a sudden comeback.

I could go on, but — $100 million in corduroy inventories? It just doesn’t sound like this is retail’s comeback year.